If you hold a money market fund like SPAXX, how it’s taxed depends on the type of account you use. Here’s the quick breakdown:

  • Taxable Accounts: SPAXX distributions are taxed annually as ordinary income at your federal and state tax rates. Even if you reinvest the earnings, you’ll owe taxes each year. Some income may be exempt from state taxes if it comes from U.S. Treasury securities, but this varies.
  • IRA Accounts: In a Traditional IRA, taxes are deferred until you withdraw the funds, while in a Roth IRA, SPAXX earnings grow tax-free, and qualified withdrawals are untaxed. IRAs also simplify tax reporting since you won’t receive a 1099-DIV for SPAXX income.

Key Takeaway:

If you prioritize liquidity and quick access, a taxable account works. But for long-term savings and tax efficiency, IRAs (especially Roth IRAs) are better as they avoid annual tax drag and allow for compounding without interruptions.

Are You Losing Money In Your Money Market Fund To Taxes? (SPAXX, SWVXX, VMFXX & More)

How SPAXX Is Taxed in Taxable Accounts

If you hold SPAXX in a taxable brokerage account, each distribution is taxed in the year it’s paid out. This can directly impact your after-tax returns.

SPAXX Distributions Are Taxed as Ordinary Income

SPAXX distributions are treated as ordinary dividends and taxed at your standard income tax rate, which ranges from 10% to 37% for 2025. For instance, if you fall into the 24% tax bracket, every dollar of SPAXX income results in 24 cents of federal tax.

It’s important to note that taxes apply in the year the distribution is made, even if you reinvest the earnings. This means you might owe taxes without actually receiving cash in hand. For example, if you receive a $500 distribution and are in the 22% tax bracket, you would owe $110 in federal taxes.

State and Local Tax Rules

Some income from SPAXX may be exempt from state and local taxes because the fund invests in U.S. Treasury securities. The portion of your distributions tied to Treasury investments is typically not subject to state or local taxation.

This exemption can lead to noticeable savings in states with high tax rates, such as California (up to 13.3%), New York (10.9%), or Connecticut (6.99%). For example, if you live in California and receive $1,000 in SPAXX distributions, with 60% coming from Treasury securities, you’d avoid state taxes on $600 of that income.

However, the percentage of exempt income varies depending on SPAXX’s portfolio at any given time. Since the fund doesn’t exclusively invest in Treasury securities, not all distributions will qualify for state tax exemptions.

For residents of states like Florida, Texas, or Nevada, where there’s no state income tax, this exemption doesn’t apply.

Tax Forms and Reporting

After understanding federal and state taxation, accurate tax reporting is essential. SPAXX income is reported on Form 1099-DIV, which you’ll receive by January 31st following the tax year. Ordinary dividends from SPAXX are listed in Box 1a of this form.

If your total dividend and interest income exceeds $1,500 for the year, you’ll need to report it on Schedule B of your tax return. Otherwise, you can include it directly on Form 1040.

If you reinvest your SPAXX distributions, keep detailed records of each transaction. Reinvestments create new tax bases, which are crucial for calculating gains or losses when you eventually sell shares. Overlooking this can lead to paying more taxes than necessary when you liquidate your position. Proper record-keeping helps ensure you don’t leave money on the table.

How SPAXX Is Taxed in IRA Accounts

When it comes to IRA accounts, the tax treatment of SPAXX takes on a different dynamic compared to taxable accounts. In a taxable account, distributions are subject to annual taxes. But in an IRA, you gain tax-deferred or even tax-free advantages, which can significantly enhance your long-term returns. This stands in sharp contrast to the yearly taxation faced in non-retirement accounts.

Tax Deferral in Traditional IRAs

If you hold SPAXX in a traditional IRA, taxes on the fund's distributions are deferred until you withdraw money from the account:

"Amounts in your traditional IRA, including earnings, generally aren't taxed until distributed to you."

This tax deferral allows your earnings to compound without interruption. Instead of losing part of your returns to taxes each year, the full income from SPAXX remains invested, generating even more returns over time.

However, there’s a trade-off. When you eventually withdraw funds from your traditional IRA - typically after age 59½ - all withdrawals are taxed as ordinary income. This includes both your original contributions (if they were tax-deductible) and any growth from SPAXX distributions over the years.

Tax-Free Growth in Roth IRAs

Roth IRAs take a different approach, offering tax-free growth for SPAXX holdings. Any distributions generated by the fund grow entirely tax-free within the account. Even better, when you make qualified withdrawals, you won't owe any taxes on the money you take out, including all the growth from SPAXX over time.

For this to work, you need to meet a couple of conditions: you must have held the Roth IRA for at least five years, and you must be over age 59½ (or meet other qualifying criteria). Unlike traditional IRAs, Roth IRAs don’t require minimum distributions during your lifetime, giving you more control over your retirement planning.

The downside? Contributions to a Roth IRA are made with after-tax dollars. That means you don’t get the immediate tax deduction you might enjoy with a traditional IRA.

No Annual Tax Reporting Required

Another benefit of holding SPAXX in any type of IRA is the simplicity it brings to tax reporting. As financial expert Yuki Kobayashi points out:

"Distributions from money market funds in IRAs or 401(k)s wouldn't generate taxable income until you withdraw from the retirement account."

Tax expert Abigail Patel further adds:

"Only the dividends from your taxable account will show up on the 1099-DIV. The dividends in your retirement accounts aren't currently taxable, which might explain why some people see different amounts than they expected."

This streamlined reporting process means you don’t have to worry about tracking reinvestments, calculating state tax exemptions, or filing additional forms like Schedule B for dividend income. Holding SPAXX in an IRA spares you the annual paperwork headaches that come with taxable accounts, making tax season that much easier.

Side-by-Side Comparison: Taxable Accounts vs IRAs

Now that we’ve broken down how SPAXX is taxed in different account types, let’s compare the key tax differences. This side-by-side look can help you decide which account might be the best fit for your money market fund investments.

Tax Treatment Comparison Table

Tax rules vary depending on the type of account:

Tax Factor Taxable Account Traditional IRA Roth IRA
Federal Tax on Distributions Taxed annually as ordinary income Tax-deferred until withdrawal Tax-free growth and withdrawals*
State Tax Treatment Partially exempt (varies by state, ~55% in 2024) Tax-deferred until withdrawal Tax-free growth and withdrawals*
Annual Tax Forms Form 1099-DIV required No annual reporting No annual reporting
Reinvested Dividends Taxable in the year earned Tax-deferred Tax-free
Tax Rate Applied Your current ordinary income rate Your future ordinary income rate 0% on qualified withdrawals

*Qualified withdrawals apply after age 59½ and a 5-year holding period.

This table highlights how taxes can affect your returns depending on the account type.

How Taxes Affect Your Returns

The tax rules we’ve covered play a big role in shaping your investment outcomes. In taxable accounts, SPAXX distributions are taxed annually, which can chip away at the compounding effect over time. This "tax drag" reduces the growth potential of your investments.

State tax exemptions further complicate things. For instance, in 2024, about 55% of SPAXX income was exempt from state taxes, but this percentage varies by state and can change year to year. Additionally, repurchase agreements in SPAXX generally don’t qualify for state tax exemptions. States like California, Connecticut, and New York impose specific quarterly thresholds (above 50% in holdings) for funds to qualify for any state tax exemptions, making the benefits less predictable.

On the other hand, IRAs - both Traditional and Roth - eliminate this annual tax burden. With a Traditional IRA, SPAXX returns grow tax-deferred until you take withdrawals in retirement. Roth IRAs take it a step further by offering completely tax-free growth and qualified withdrawals. If you anticipate being in the same or a higher tax bracket in retirement, these tax advantages can make a big difference.

When your investments grow without the drag of annual taxes, the compounding effect is amplified, potentially leading to stronger overall returns in the long run.

When to Hold SPAXX in Each Account Type

Deciding where to hold SPAXX depends on factors like your tax bracket, how quickly you might need access to your funds, and your broader financial goals. Each account type offers unique advantages, and understanding these nuances can help you make smarter decisions to maximize your after-tax returns. Let’s break it down.

Best Times to Use Taxable Accounts for SPAXX

Taxable accounts are a great choice for SPAXX when access to your money is a top priority. SPAXX acts as a core position for uninvested cash, enabling quick cash transactions. This makes it a solid option for parking an emergency fund or cash you might need on short notice.

One standout feature of SPAXX in taxable accounts is its same-day settlement capability. If you’re building an emergency fund or need cash available for unexpected expenses, this liquidity is invaluable - especially since retirement accounts often come with withdrawal restrictions.

Taxable accounts also make sense if your tax rate is relatively low. The partial state tax exemption on the portion of SPAXX derived from U.S. government securities offers a small tax break, which can be helpful in this scenario.

Another reason to consider taxable accounts is their flexibility for managing short-term cash flows. If you’re frequently moving money for investments, business needs, or other financial activities, the ease of access in a taxable account outweighs the tax implications.

Best Times to Use IRAs for SPAXX

For situations where tax efficiency matters more than immediate liquidity, IRAs are a better fit for SPAXX. If you’re in a higher federal and state tax bracket, holding SPAXX in a taxable account could reduce compounded returns due to annual taxes. With an IRA, those taxes are deferred, allowing your returns to grow uninterrupted.

Traditional IRAs are particularly useful if you expect to be in a lower tax bracket during retirement. The tax-deferred growth means SPAXX distributions can compound without the drag of annual taxes, potentially leading to stronger long-term results.

Roth IRAs, on the other hand, offer a unique advantage for SPAXX, especially for long-term savings goals. Since money market funds generate ordinary income taxed at your highest marginal rate, holding SPAXX in a Roth IRA eliminates that tax burden entirely. This can be especially beneficial for younger investors who have decades ahead to benefit from tax-free compounding.

Another perk of using IRAs is the simplified tax reporting. You won’t receive a Form 1099-DIV for SPAXX held in an IRA, which reduces the complexity of your annual tax preparation. This can be a relief if you’re juggling multiple accounts and want to streamline your paperwork.

How Mezzi Helps with Tax Optimization

Mezzi

Managing SPAXX across different accounts can get tricky, especially when balancing tax efficiency with liquidity. This is where Mezzi’s platform comes in, offering tools to simplify and optimize your strategy.

Mezzi’s account aggregation feature gives you a complete view of all your investments, including SPAXX, across taxable and retirement accounts. Instead of logging into multiple platforms to track your cash positions, you can see everything in one place. This makes it easier to decide where to hold your money market funds.

The platform also offers advanced tax optimization tools, helping you avoid costly mistakes like wash sales across multiple accounts. By actively monitoring for tax-saving opportunities, Mezzi ensures you’re not leaving money on the table.

What really sets Mezzi apart are its AI-driven insights, which analyze your tax situation, liquidity needs, and long-term goals to recommend the best SPAXX allocation. These personalized suggestions make it easier to optimize your financial strategy without the guesswork.

Lastly, the X-Ray feature provides a detailed breakdown of your total cash exposure. If you’re holding SPAXX in multiple accounts, this tool ensures you’re not over-allocated to money market funds when those funds could be working harder in higher-growth investments within tax-advantaged accounts.

Key Points for Tax-Smart Investing

How SPAXX is taxed across different account types can have a noticeable impact on your long-term returns. For instance, as of September 30, 2025, SPAXX's average annual return after taxes on distributions was 2.89%, compared to 4.14% before taxes. That gap underscores the role taxes play in shaping your investment outcomes.

The reason is straightforward: SPAXX generates income taxed at your highest marginal federal rate, which can range from 10% to 37%. In taxable accounts, you’ll owe taxes on dividends annually - even if you reinvest them - potentially slowing the compounding of your returns over time.

On the other hand, tax-advantaged accounts provide a better setup. With a Traditional IRA, taxes are deferred until withdrawal. Roth IRAs, however, allow for tax-free growth and qualified withdrawals, making them particularly appealing for investments like SPAXX, which produce ordinary income that’s typically taxed at higher rates.

Another plus for IRAs? They simplify tax reporting. When SPAXX is held in a retirement account, you won’t receive a Form 1099-DIV, saving you some paperwork.

For taxable accounts, there is a partial state tax exemption to consider. About 55% of SPAXX’s income may be exempt from state and local taxes for 2024. While helpful, this partial exemption doesn’t come close to the benefits of tax deferral or tax-free growth that IRAs offer - especially for those in higher tax brackets.

This brings us to asset location. Since SPAXX is less tax-efficient in a taxable account, placing it in a tax-advantaged account can help lower your overall tax burden. This is particularly relevant if you’re using SPAXX as a short-term cash reserve.

For immediate liquidity needs, a taxable account can work despite the annual taxes. However, for long-term savings, IRAs provide a better boost to after-tax returns. Align your account choice with your financial timeline and tax situation - strategic planning here can make all the difference in maximizing your after-tax growth.

FAQs

What are the tax differences between holding SPAXX in a taxable account and an IRA?

The tax implications of holding SPAXX vary depending on the type of account you use. If you hold SPAXX in a taxable account, any income it generates - such as interest - is typically subject to federal income tax. Some of this income might also be exempt from state taxes, depending on the specific tax rules for that year. This income is reported annually and could impact your overall tax burden.

On the other hand, holding SPAXX in an IRA comes with tax benefits. In a Traditional IRA, earnings grow on a tax-deferred basis, meaning you won’t owe taxes until you start making withdrawals during retirement. If you opt for a Roth IRA, the growth is tax-free, provided you adhere to the withdrawal rules. These features make IRAs a potentially more tax-friendly choice for long-term savings compared to taxable accounts.

Are SPAXX distributions exempt from state income taxes, and how does this vary based on the fund's holdings?

Some of the income earned through SPAXX may qualify for state income tax exemptions, depending on the fund's investments and your state of residence. For instance, in 2023, 41% of SPAXX's income was exempt from state taxes. However, this percentage isn't fixed and can vary annually. It's also worth noting that certain states, such as California, Connecticut, and New York, did not grant any state tax exemptions for SPAXX distributions.

The percentage of exemption is determined by the fund's investment makeup. To see how this impacts your specific situation, it's wise to review the fund's annual tax details and assess how they align with your state's tax policies.

What are the tax benefits of holding SPAXX in a Roth IRA versus a Traditional IRA?

Holding SPAXX in a Roth IRA comes with the perk of long-term tax savings. With a Roth IRA, your earnings grow without being taxed, and when you make qualified withdrawals during retirement, they’re tax-free too. This setup can be especially appealing if you anticipate being in a higher tax bracket in the future.

On the other hand, a Traditional IRA offers tax-deferred growth. This means you won’t owe taxes on contributions or earnings until you start making withdrawals. However, those withdrawals are treated as ordinary income, which might lead to a bigger tax bill depending on your retirement income. Deciding between the two boils down to your current tax situation and what you’re aiming for financially in the long run.

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